Trends in FDI in India

December 22, 2011

Indian has been attracting foreign direct investment for a long period. The sectors like telecommunication, construction activities and computer software and hardware have been the major sectors for FDI inflows in India.

According to AT Kearney report India sits in 3rd place on the FDI Confidence Index globally. European and North American investors place it 3rd, while Asia-Pacific investors’ rank it 4th. India is the top location for nonfinancial services investment, and also scores highly in heavy industries, light industries and financial services. Even during economic crisis looming largely on other economies, FDI inflows to India soared from US$25.1billion in 2007 to US$41.6billion in 2008.

Multinationals are managing to counter FDI restrictions and supply chain challenges at the most possible way showing path to others who are hesitant to enter into Indian market. For instance, Wal-Mart has taken steps to develop supply chains, procure 30-35 per cent local produce, making changes to its stock policy by reducing inventories etc. Similarly, Auto majors are pumping money in the sector. Ford planned to invest US $500mn in its Chennai plant, Nissan-Renault planning to manufacture ultra-low-cost car with its local partner Bajaj Auto, French tyre maker Michelin’s to invest US$874mn in its first Indian manufacturing facility. All these developments are helping in getting FDI inflows into the country.

The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure investors from every corner of the world. As a result FDI inflows during 1991-92 to March 2010 in India increased manifold as compared to during mid-1948 to March 1990. As per the fact sheet on FDI, there was Rs 6,303.36 billion FDI equity inflows between the period of August 1991 to January 2011.

The FDI inflows in India during mid-1948 were Rs 2.56 billion. It is almost double in March 1964 and increases further to Rs. 9.16 billion. India received a cumulative FDI inflow of Rs. 53.84 billion during mid-1948 to march 1990 as compared to Rs.1,418.64 billion during August 1991 to march 2010.

An annual FDI inflow indicates that FDI went up from around negligible amounts in 1991-92 to around US$9 billion in 2006-07. It then hiked to around US$22 billion in 2007-08, rising to around US$37 billion by 2009-10.

FDI flow in India (in crores)

Even if we examine quarterly figures, we find that FDI flows that rose from US$6.9 billion in the second quarter of 2009 to a peak of US$8.2 billion in the third quarter of that year, have since stayed in the 5-6 billion range for all but one quarter, namely January-March 2011. In fact, if we consider the 16 quarters ending Jan-March 2011, there have been only two in which FDI inflows stood at between US$6-7 billion and four when it exceeded US$7 billion.

It is now clear that FDI was related to the recessionary conditions in the western economies. The recent flattening of monthly FDI flows is a sign more of recovery in the western economies than any loss of long term interest in the Indian economy. The monthly figure only shows that the incremental FDI is going back to the pre-recession years rather than indicating decline of FDI into India.

In fact when foreign direct investment into India had “tumbled 32 per cent to just US$3.4 billion” , as mentioned in financial times during January to March 2011 that it emerged that net FDI flows in the month of April alone amounted to US$3.1 billion.

Also, FDI is all about long term investment. Companies have already invested in to India and are unlikely to move elsewhere. Unless any dramatic negative changes in policy, FDI will continue to inch upwards.

Recent trends have also shown that FDI inflow changes are mainly due to portfolio investment, which displayed a degree of volatility.

Source of FDI: The list of investing countries to India reached to maximum number of 120 in 2008 as compared to 15 in 1991. Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows is vested with few major countries.

Mauritius is the major investing country in India during 1991-2008. Nearly 40per cent of FDI inflows came from Mauritius alone. The other major investing countries are USA, Singapore, UK, Netherlands, Japan, Germany, Cypress, France and Switzerland. An analysis of last eighteen years of FDI inflows in the country shows that nearly 66per cent of FDI inflows came from only five countries viz. Mauritius, USA, Singapore, UK, and Netherlands.

Mauritius and United states are the two major countries holding first and the second position in the investor’s list of FDI in India. While comparing the investment made by both countries, one interesting fact comes up which shows that there is huge difference in the volume of FDI received from Mauritius and the US. It is found that FDI inflows from Mauritius are more than double from that of US.

FDI-Sectoral analysis: FDI inflows are welcomed currently in 63 sectors as compared to 16 sectors in 1991. The sectors receiving the largest share of FDI inflows upto 2010 were the service sector and computer software and hardware sectors, each accounting for 22.14 per cent and 9.48 per cent respectively. There were followed by the telecom, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing, information; and professional, scientific and technical services.

Infrastructure sector received 28.62% of total FDI inflows from 1991-2008

Services sector received 19.34% of total FDI inflows from 1991-2008.

Trading sector received 1.67% of total FDI inflows from 1991-2008.

Consultancy Sector received 1.14% of total inflows from 2000-2008

Education sector received US $308.28 million of FDI inflows from 2004-2008.

Housing and Real Estate Sector accounts for 5.78% of total FDI inflows during 2000-2008.

Construction Activities Sector received 6.15% of the total inflows during 2000 to Dec. 2008.

Automobile Industry received US $3.2 billion of total FDI inflows to the country during 2000 to 2008.

Computer Software and Hardware sector received US $8.9 billion of total FDI inflows during 2000 to Dec. 2007.

Telecommunications Sector received an inflow of US $8.2 billion during 1991 to 2008.